I like to focus on teaching mystudents how to grow their accounts exponentially like this:
But people LOOOOOVE (and greatly prefer) talking about speculating on hot internet IPOS like Facebook and Twitter.
I don’t usually invest in IPOs since they are extremely risky and I likes having a good risk to reward ratio, but I do like to talk about them. So here is a blog post with a basic intro to what IPOs are and a bit more on what is called a lockup period, since social media giant Twitter recently had one and it could test the stock’s price the next few days.
When a company wants to become publically traded, they file for what is called an Initial Public Offering. Investopedia (http://www.investopedia.com/terms/i/ipo.asp) describes this as:
The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. It is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values.
Companies like Twitter and The Container Store were two popular IPOs this year. With the IPO comes a lockup period. Investopedia says http://www.investopedia.com/terms/l/lockup-period.asp &http://www.investopedia.com/terms/i/ipolockup.asp:
The lockup period is a contractual caveat referring to a period of time after a company has initially gone public, usually between 90 to 180 days. The IPO lock-up is a common lock-up period in the equities market used for newly-issued public shares.
Typically, only 20% of the outstanding shares are initially offered to the investing public. A single large shareholder trying to unload all of his holdings in the first week of trading could send the stock downward, to the detriment of all shareholders.
They are in place to prevent shareholders with a large proportion of ownership (such as company executives) from flooding the market with shares during the initial trading period. During these initial days of trading, company insiders or those holding majority stakes in the company are forbidden to sell any of their shares. Once the lock-up period ends, most trading restrictions are removed. There is also empirical evidence suggesting that after the end of the lock-up period, stock prices experience a permanent drop of about 1-3%.
Think of it as a basic supply and demand problem. If you flood the market with supply without having an equal amount of increased demand, the price should fall.
Twitter recently had their first lockup expiration expire, and traders will find out how the stock reacts when the market opens up after Presidents Day in the U.S. Nearly 9.9 million shares were set free on Saturday. Not all of them will necessarily be sold, but if they are, that’s worth roughly $565 million.
This may be the first test, but a larger test will come in May when the lockup expiration is much larger. Investors and traders are referring to this as simply an early test. If the stock were to decline by, say, 5 percent or so on Tuesday, then people would anticipate a greater or equal drop at the next expiration in May. Unlike Facebook, no Twitter insiders sold at the IPO.
That was obviously a good decision so far since Twitter’s IPO was at $26 and it is now trading in the high $50s (meaning is has more than doubled since the November IPO. Twitter hasn’t seen many steep declines since its IPO either. The most recent was when they had their first earnings announcement as a public company.
Investors and analysts were disappointed in their user growth, and the stock fell from $65 to $50. Since this is also tax season, many of the employees or “insiders” selling their shares in the lockup will use the funds to settle income taxes from vesting shares, according to the Wall Street Journal (http://blogs.wsj.com/digits/2014/02/13/twitters-first-lockup-expires-on-saturday/).
Shares at the social networking giant Facebook tumbled 6.4% (a new low at the time) when the first batch of shares became eligible for sale in August 2012. About 271 million shares of Facebook were eligible to be sold at that time. That is a much larger number than Twitter, but Facebook also has a great number of shares outstanding, meaning it isn’t as large of a difference in percentage terms. Twitter is setting free 1.8% rather than Facebook’s 13%.
The bigger lockup expiration will come on May 6. This is when the rest of the 474.7 million Twitter shares will become eligible for sale. Owners of these shares include Twitter executives, directors and owners with big stakes in the company, such as early backers Benchmark Capital, Union Square Ventures and Rizvi Traverse, according to the WSJ.